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FCA proposes changes to handbook related to UCITS V Implementation

3rd September 2015

The Financial Conduct Authority has today called for consultation in relation to three sets of proposed changes that will affect the regulation of authorised investment funds in the lead up to UCITS V implementation on the 18th March 2016.

CP15/27: UCITS V implementation and other changes to the Handbook affecting investment funds

This consultation paper will be of particular interest to UCITS management companies, AIFMs and depositaries of UCITS and AIFs (including ELTIFs), representative trade bodies, business advisers and consultants, other advisers and distributors involved in or linked to the fund management industry in the UK as well as investors in authorised funds and their representatives.

Summary of FCA’s UCITS V Consultation Paper

Today’s FCA Consultation Paper has been split into three sections with the first part calling for consultation on the most recent changes to the UCITS Directive - UCITS V - and the impact it will have on the rules and guidance. Along with all other EU member states, UCITS V provisions must be implemented into national law by 18th March 2016. Comments on Part One of the consultation Paper are due to the FCA by 9th November 2015.

As a reminder, the provisions under UCITS V will amend and stand alongside the current UCITS Directive (UCITS IV), rather than replace current provisions entirely, as has occurred previously.

The second part of the FCA’s Consultation Paper laid out the changes to the Handbook that will ensure the EU Regulation introducing European long-term investment funds (ELTIFs) will effectively operate. As noted in the Consultation Paper, the ELTIF Regulation will apply this year from 9th December 2015.

The third and final part of the Paper saw the FCA put forward consultation on a number of changes to the Handbook that will keep the rules and guidance up to date for authorised investment funds. In this section the FCA invited stakeholder’s to provide feedback on some of the points raised for discussion so that the regulator can consider consulting on these in the future, should there be a case for changing the rules.

Soft-Closure of Funds

In particular the FCA invited feedback on whether there should be increased flexibility surrounding the soft-closure of funds, as they are aware that the soft-closure of a fund can cause problems for investors, particularly at short notice.

"We have been asked by some Authorised Fund Managers (AFMs) and trade associations to look at allowing more flexibility to restrict or cease the issue of units to investors at short notice - a practice sometimes referred to as ‘soft-closure' of a fund, although the term has no established definition and can refer to a range of practices.

"Closure to new investment at short notice could create problems, given that many investors use both financial advisers and intermediaries (such as platform service providers), who need to be aware of the AFM's intentions so they, in turn, can stop accepting new investments.

"We wish to look at the benefits and risks of other options that might be attractive to AFMs, such as allowing existing regular savings investments to continue while closing to new lump-sum investments."

Feedback from fund groups on the range of options to help manage soft-closures, (which includes allowing investors to continue regular savings into a vehicle but closing to new lump-sum investments), are due to the regulator by 7th December 2015.

What is UCITS V?

UCITS V aims to increase the level of protection already offered to investors in UCITS and to improve investor confidence in UCITS. It aims to do so by enhancing the rules on the responsibilities of depositaries and by introducing remuneration policy requirements for UCITS fund managers. UCITS V also aims to ensure that all EU regulators responsible for the supervision of UCITS funds and their managers have a common minimum set of powers available to investigate infringements of national laws transposing the UCITS Directives and to sanction any breaches.

UCITS V Summary of main changes

The following provides a summary of main changes that UCITS V will bring. These are:

for each UCITS there will be a requirement to appoint a single depositary thus disallowing the appointment of multiple depositaries
the key functions and duties of a depositary to monitor cash movements to and from the fund, to safe keep the assets of the UCITS and to oversee the performance of the fund manager are to be harmonised
a depositary needs to comply with specific safe-keeping requirements in respect of financial instruments/other assets that may be held in custody, including segregation requirements.
member states will be required to ensure that assets held in custody by a depositary (or its delegate) are protected in the event of insolvency of the depositary (or its delegate)
there will be an exhaustive list of entities that are eligible to act as a depositary of a UCITS
the depositary will be made liable for avoidable loss of a financial instrument held in custody (i.e. strict liability regime imposed)
UCITS management companies will be required to have remuneration policies that comply with certain remuneration principles and cover key staff. These policies must also be transparent.
the administrative sanctions that must be available to EU regulators for UCITS Directive breacheswill be harmonised.

UCITS V Implementation & Proposed Handbook Rule Changes